Amid speculation that European supermajor Shell is weighing a merger with its U.K. counterpart BP, Hart Energy reached out for expert perspective on the prospective deal, which could hinge in part on interest in accessing Permian Basin shale interests held by BPX, BP’s U.S. affiliate. BPX’s sizeable footprint includes the Eagle Ford and Haynesville shales.
Stephen Trauber, managing director, chairman and global head of energy and clean technology at Moelis, breaks it down in this exclusive interview with Deon Daugherty, editor-in-chief of Oil and Gas Investor.
This interview has been edited for clarity, length and style.
Deon Daugherty, editor-in-chief, Oil and Gas Investor: So late last year, you and I were talking about M&A, and you mentioned that maybe it would make sense for the U.S. majors, the likes of Exxon Mobil and Chevron, to purchase their European peers simply because those majors had put so much into the energy transition and it had not paid off. In light of the speculation about Shell buying BP, let’s revisit that train of thought. How are you looking at this sort of mega merger now?
Stephen Trauber, managing director, chairman and global head of energy and clean technology, Moelis: Having worked on many of the super major deals that came together 20 years ago between Exxon and Mobil, Chevron and Texaco, Conoco and Phillips Petroleum, I start with the fact that there tends to be billions of dollars of value created by putting these large companies together and high-grading the asset portfolio, improving returns, improving free cash flow, reducing capex on a combined basis, et cetera.
That story still holds true today. That same philosophy is why some of these other bigger deals happened that we saw over the last 18 months. There are tremendous benefits and savings by doing that. And there happens to be now a pretty big disparity in the valuation between European majors and the U.S. majors because the European majors, particularly Shell and BP, went down a path of diverting a lot of their free cash flow into what I would state was low-returning energy transition/cleantech M&A opportunities. They lost their shareholder base as a result of that, and their valuations have suffered.
DD: Do the U.S. majors find the international majors interesting from an asset-fit perspective?
ST: That becomes a key question from a valuation perspective. It looks clearly very additive when you add in the disparity in valuations and the synergies achievable during those combinations. The other big question is always, ‘Will the governments, the local governments where these companies are domiciled, will they let their large energy companies be bought by U.S. companies?’ Another big question: Are there any trust issues, particularly in the areas of marketing and retail between these companies?
Looking at where these things trade today, I'm pretty certain most of the U.S. majors have at least looked at these companies to see if it would be worthwhile. They are at least thinking about it. I would also say that at the moment, Exxon and Chevron are tied up in trying to resolve the dispute over Hess [Guyana assets]. So that makes it complicated from a time perspective.
DD: Right, that makes sense. And it looks like BP has $70-something billion in debt. That seems like a lot to take on. Could Shell take it on conceivably when they've got some debt racked up too?
ST: Any of the majors could take it on because one of the things they would do is sell assets, right? And I think there are ways to be able to take that on and reduce debt, number one through cost savings, number two through asset divestitures. So yeah, I think both companies could take on the debt, but they would want to reduce debt I'm sure within a 12-[month]-to 24-month period.
DD: What’s your thought on whether BP wants to merge?
ST: I have strong thoughts there. I think BP would not like to merge. They're a proud company. They've been around for a long time. They're a national champion in the U.K. and I am sure that they do not want to merge.
Now wanting to merge and identifying the best way to create shareholder value are two different things. There are shareholders [that] also say when you're a national champion, like BP is within the U.K., shareholders exclusively is not the only constituent that you have to look out for. You've got a national need and energy that has to be looked after, you have jobs you have to look after. All of those things typically get evaluated in the context of M&A when you're talking about national champions.
DD: What do you think makes more sense—an American company buying BP or another European company merging with BP?
ST: I think in this particular case, given that Shell is now domiciled in the U.K. as well, creating a very strong company between those two makes a lot of sense versus a U.S. company stepping in.
I think there are synergies, large synergies both ways in terms of both European consolidation as well as U.S.-European consolidation. It really depends upon the quality of the assets. Who do the assets fit best with? I tend to think when you look at Shell and BP—and I think both, if they're honest with you, which they said they would be—[acknowledge] they've lost their way a little bit in direction trying to chase the clean energy transition opportunity set and [have been] pushed relatively heavily by national agendas on the clean tech and climate change agenda. And as a result, both companies probably could stand to be a little stronger. Right now, they're each pursuing their individual strategies to do that.
But is there a path that says, ‘Together we're better, we're stronger, we can sell lower return businesses, we can combine our clean energy businesses together to give it scale. Our current shareholders own those businesses. Should we spin that off to our shareholders and let them continue to own it? Or should we take that business and merge it with somebody else to make it stronger?’ Those are all places that need to be evaluated.
I would suggest that the two clean tech businesses together [would be] a lot stronger and the upstream portfolio between Shell and BP would be stronger together. And the big issue, the big question mark in all of this is culture. …Can you combine the BP and Shell culture and end up with a culture within a combined organization that is strong and not detrimental to the company's objectives?
DD: If Shell and BP were to merge, what would be the terms of the agreement do you suppose? Would it be cash and stock or maybe all cash? How would that play out?
ST: My guess, and this is pure conjecture because I'm not involved in it, is if—and that’s a capital ‘I’ and a capital ‘F’—there were a transaction consummated between the two, my guess is it would be likely an all-stock combination of stock-for-stock.
Looking at the relative value of the two companies, obviously oil prices are down, so it's hard to sell something that has a heavy oil component for cash today. Now I would say to be fair, if Shell were to acquire BP and give a bunch of cash to shareholders, those shareholders can turn around tomorrow and buy the combined entity. So, they really should be indifferent to it other than there will be some potential shareholder tax implications. Although most institutional shareholders don't pay the taxes. And so, my guess is most of these sorts of big deals tend to be stock for stock. They probably don't want to take on more leverage than what the combined entities have today. As we talked about earlier, I think they'd want to reduce that through asset sales. I'm pretty confident if a deal were to be consummated, it would be a stock-for-stock deal.
DD: So, what am I missing?
ST: I think you got it. I think the big question mark is: number one, is the local government going to let these two companies combine, or do they want two strong entities? Or does the government feel that combined they will be bigger and stronger and be the national champion? Much like Eni is in Italy and Repsol is in Spain and [TotalEnergies] is in France. Is this combined entity a bigger, stronger entity and more appealing to investors? The answer I would have to say is yes, provided that culturally they can combine the two companies and end up with a very strong, vibrant company as a result of the combination.